Raging Inflation Suggests Another 75-Point Interest Rate Hike


Money with Federal Reserve logo | Image by Shutterstock

The next Federal Reserve Open Market Committee (FOMC) meeting is planned for early November, and policymakers are widely expected to hike interest rates by another 75-basis points. They have already implemented rate increases of this magnitude three times in 2022 so far.

Fed officials continue to use higher interest rates as their weapon of choice against stubbornly high inflation to little avail. The last reading saw consumer prices climb by 8.2% versus year-ago levels, a 40-year high. Policymakers are expected to address the merits of their aggressive approach in November.

“We will have a very thoughtful discussion about the pace of tightening at our next meeting,” stated Fed Governor Christopher Waller in a recent speech.

However, not all Fed officials are on the same page. Some, including Fed Vice Chairwoman Lael Brainard and Chicago Fed President Charles Evans, have said they should be exploring putting the brakes on rate hikes by early 2023. In doing so, they can gain a better understanding of the economic slowdown that has resulted from their hawkish policy and prevent conditions from worsening for Americans.

Meanwhile, other policymakers, like Fed President Loretta Mester, believe it is too early and “wishful thinking” to change course, considering the stubborn inflation that shows no signs of easing. The benchmark federal funds rate currently sits between 3% and 3.25%. A year ago, the rate was close to zero.

For context on how fast and furiously rates have been increasing, before this year, Fed officials had not implemented a 75-basis point increase since about the mid-1990s. If they go forward with the expected plans for an increase of this magnitude at their upcoming meeting, November would mark the fourth straight 75-basis point increase year-to-date.

When the Fed increases the target federal funds rate, it is raising the rate for banks to borrow and lend to each other overnight. This rate also makes its way into the rates at which consumers borrow and save money in their daily lives, including in mortgage loans, credit cards, auto loans, etc.

Adding insult to injury, the economy has yet to show signs of improvement. Instead, Americans are facing higher borrowing costs on everything from mortgages to credit cards. After already rising above 7%, mortgage rates could go even higher in 2023.

Christopher Whalen, chairman of Whalen Global Advisors, told MarketWatch that if the Fed does not change course soon, mortgage rates will approach 10% next year.

In addition to the upcoming November meeting, policymakers have another meeting scheduled for December. Assuming they move forward with a 75-basis point increase next month, they must decide whether to ease up in December with a smaller increase.

If the Fed changes course, Chairman Jerome Powell is likely to prepare investors ahead of time considering his influence in the markets. Any pullback in the Fed’s aggressive rate strategy could prompt a rally in the stock market, as investors interpret that as good news for corporate America. However, there is also the possibility that the Fed simply takes a breather in December only to resume its hawkish path once again in 2023.   

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